Macy's, Kohl's Fall After Citigroup Warns of `Tough Quarter'

Shares of Macy’s Inc. and Kohl’s Corp. declined after Citigroup Inc. cut its earnings estimates for the companies, saying the industry is suffering from a sales slowdown and inventory glut.

Citigroup analyst Paul Lejuez also reduced target prices for the two stocks after checking on sales channels and assessing commentary from vendors, including Michael Kors Holdings Ltd. and Ralph Lauren Corp. He now expects Macy’s to post earnings of 47 cents a share for the third quarter, down from an earlier estimate of 52 cents. The analyst trimmed his Kohl’s estimate to 58 cents a share from 69 cents.

Department stores, already facing a slowdown in foot traffic at U.S. malls, have struggled to clear out-of-season products from their shelves. Ralph Lauren and Michael Kors have both cited problems with excess inventory. Unseasonably warm weather also has hurt sales because fewer consumers are buying winter clothes.

“The department store channel had a tough quarter (and faces a challenging future),” Lejuez said in a report. “Warm weather combined with already weak traffic trends likely led to a shortfall in sales, and we expect inventory to appear elevated across the sector.”

Macy’s fell 5.4 percent to $46.24 at the close of trading in New York on Monday, the biggest decline in almost three months. Kohl’s dropped 5.6 percent to $43.98.

Investors have soured on the two department-store chains to a historic extent. Kohl’s is trading at about 10.3 times earnings, a 44 percent discount to the Standard & Poor’s 500 Index. That’s its biggest discount to the index on record, according to data compiled by Bloomberg. Similarly, Macy’s is trading at a 42 percent discount to the S&P 500, the biggest since July 2009.

Lejuez lowered his price target for Macy’s to $48 from $52. For Kohl’s, he reduced it to $46 from $50. Lejuez maintained a neutral rating on both stocks.

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